- (1.) On an application under Section 256(2) of the Income-tax Act, 1961, the Tribunal has referred the following question for our opinion : "Whether, on the facts and in the circumstances of the case and in the absence of any nexus between the earning of interest income from fixed deposit and the expenditure by way of gratuity, the Tribunal was justified in law in holding that the payment of gratuity amounting to Rs. 89,572 is an allowable expenditure within the meaning of section 57(iii) of the Income-tax Act, 1961, and in that view deleting the addition of the same amount ?"
(2.) The assessee carried on business in generation and supply of electricity till 1975 which was taken over by the Bihar Government under the Bihar Electricity Supply Undertakings (Acquisition) Ordinance, 1975. The compensation was paid in terms of the Ordinance, 1975. Thereafter, the asses-see has continued the employment of some of the employees for earning the interest income assessable under the head "Income from other sources". During the previous year in addition to the salary the assessee has also paid gratuity to Sri Subrata Mitra and Ranjit Kumar Banerjee totalling Rs. 89,572 and claimed the deduction of the salary as well as gratuity to the employees under Section 57(iii) of the Act. The Income-tax Officer as well as the Commissioner of Income-tax (Appeals) did not allow the claim of the assessee. However, the Tribunal has allowed the claim of the assessee holding that the employees were rendering services to the assessee for earning its income assessable under the head "Income from other sources" and concluded the matter in para. 3 of its order which reads as under : "3. We have considered the submissions of both the rival parties. The gratuity during the year has been paid to Sri Subrata Mitra and Ranjit Kumar Banerjee of Rs. 47,363 and Rs. 47,209 aggregating to Rs. 89,572 on the retirement from service on June 16, 1980, and July 31, 1980, respectively. The salary paid to these two employees up to the date of their retirement has been allowed on the basis of the Commissioner of Income-tax (Appeals)'s order. It, therefore, does not stand to reason why gratuity was paid to the aforesaid two employees on the basis of the terms agreed upon in the memorandum of settlement entered into by the assessee with its employees' union on April 5, 1979. These two employees we find from the Commissioner of Income-tax (Appeals) order were employed at the asses-see's head office. Both the decisions relied on by the Income-tax Officer are not applicable to the facts of the instant case inasmuch as in the case of Gemini Cashew Sales Corporation the point at issue was whether the retrenchment compensation payable to the employees of a firm which stood dissolved and its business was taken over and continued by the surviving partner could be allowed as a business expenditure in computing the income of the firm for the assessment year 1958-59. It was held that the liability to pay retrenchment compensation arose for the first time after the closure of the business and not before. It was further held that the liability arose not in the carrying on of the business but on account of the transfer of the business. In the Allahabad High Court case also the point for consideration was whether litigation expenses incurred by a clearing house in defending civil suits which had been filed by its members while it was carrying on its business could be allowed deduction under Section 10(2)(xv) of the Indian Income-tax Act, 1922, from its other income after its business was stopped. In the instant case though the business in generation and supply of electricity was taken over by the Government the assessee continued to exist. It derived income from fixed deposits assessable under Section 55, i.e., income from other sources. Consequently, the expenditure incurred for earning of the income has to be allowed in terms of Section 57(iii) of the Act. It has been held by the Allahabad High Court in the case of CIT v, Rampur Timber and Turnery Co. Ltd. [1981] 129 ITR 58 that for an expenditure to come within the ambit of Section 57(iii) it must be incidental to the making or earning of the income and there must be a nexus between the character of the expenditure and the making or earning of income. In the present case, the employees who retired during the previous year were employed in the assessee's head office and it cannot be disputed that their services were utilised by the assessee for earning its income assessable under the head 'Income from other sources'. That being so the gratuity paid to them on retirement is an allowable expenditure within the meaning of Section 57(iii) of the Act. We accordingly delete the addition of Rs. 83,572."
(3.) Learned counsel for the Revenue, Mr. Mitra, submits that in view of the decision of the apex court in Vijaya Laxmi Sugar Mills Ltd. v. CIT [1991] 191 ITR 641, the salary, legal fees, liquidation expenses, etc., should not be allowed while the assessee earned only the interest income.;